Senator pushes Navy to reimburse Northrop for post-Katrina delays
Such costs are generally covered by insurance, but the defense giant and its insurer are in litigation.
Senate Appropriations Chairman Thad Cochran, R-Miss., has added language to the fiscal 2006 emergency supplemental to require the Navy to pay for up to $500 million that shipbuilder Northrop Grumman Corp. could lose as a result of post-Katrina contracting delays.
The Pentagon and House Republicans are opposing the language in the $106.5 billion bill that would require the Navy to pay the defense giant for "business disruption" costs in advance of any insurance settlement. Such costs generally are covered by insurance, but Northrop and its insurer are in litigation over damage to a Northrop facility in Mississippi, Cochran's home state.
Northrop would have to reimburse the Navy later, but the Pentagon fears that money might not materialize. "We don't think it's in our best interests to do this," said Capt. Tom Van Leunen, chief spokesman for the Navy's acquisition office.
Payments to Northrop could range anywhere from $150 million to the full $500 million out of up to $2.7 billion in appropriated funds for Katrina-related damage, depending on the outcome of negotiations. That could defer necessary Navy expenditures for a year or more.
"We budgeted [the request] for government facilities. That does not include fixing a Northrop Grumman crane," Van Leunen said.
A Northrop spokesman said the money would be used -- not for facilities damage -- but for overhead costs incurred by delivery delays as Congress intended. The company is not "seeking a bailout, but rather payment to the shipyards to help in the restoration and recovery of these shipyards to pre-Katrina performance levels," said Northrop spokesman Randy Belote.
The House probably will object when the supplemental reaches conference next month. The report accompanying its $91.9 billion version said the committee "believes strongly" that shipbuilding funds in the measure and in last year's Katrina supplemental "should not be used to substitute for private insurance benefits."
In last year's bill, Congress appropriated $1.7 billion for shipbuilding; the Senate provided another $1 billion in the fiscal 2006 bill. But concerned about possible overlap with private insurance claims, the House cut $250 million from the request and barred any funds from being obligated until the Navy certifies it would not be used to cover third-party reimbursements.
Last year's supplemental codified a House-Senate agreement that any higher shipbuilding costs as a result of equipment delivery delays are "not subject to reimbursement by any third party," meaning the Navy could not pay costs normally covered by insurance. But Cochran's spokeswoman said it was important to get the shipyards up and running.
"Slow shipyard restoration causes significant risk of cost increases and delayed ship deliveries to the Navy," she said, adding that three- to six-month delays as currently envisioned could cost the government $300 million to $600 million.
While the language does not specifically name Northrop, it would not apply to other contractors that suffered disruptions at its Gulf Coast facilities. Northrop already has received $500 million in insurance coverage to pay for facilities damage, but is suing its insurer, Factory Mutual Insurance Co., for another $500 million for costs resulting from delays at its major shipyards at Ingalls, Miss., and Avondale, La.
Northrop argues it could take years to resolve the insurance claims. The Pentagon's contract office argued the provision would be "inappropriate" and could set a precedent for insurers to deny claims in the future if the government agrees to pay in advance.
Advance payment by the government "may otherwise relieve the carrier from their policy obligation," said a Sept. 28, 2005, memo from Donald Springer, a Defense Contract Management Agency executive. The nonpartisan Congressional Research Service, in an April 7 report, said the Senate language could effectively "expand the types of costs that the Navy would be liable to pay, reduce the Navy's bargaining leverage with its contractors, and affect the contractor's resolve in bargaining with its insurer."